Investors worry about cities' bad credit

The biggest financial challenge facing most cities is not bankruptcy, but bad credit, according to a new report. Researchers for Morgan Stanley, the Wall Street financial giant, warned potential investors about the weak credit quality of many U.S. cities, according to Reuters.

The researchers said that “analysis of recent Chapter 9 filings affirms that bankruptcies may pick up somewhat, but the ongoing determination of local credit quality is a more relevant systemic risk,” according to Reuters. The ongoing risks, the researchers said, include state aid cuts to cities and declining tax revenues to local governments because of the collapse of the housing market.

Those same factors were cited in a recent report, “The Local Squeeze,” from the Pew Center on the States. The report said local governments are caught in a bind as state aid and property taxes, which together account for more than half of local revenues, are dropping simultaneously for the first time since 1980.

The Morgan Stanley researchers said recent municipal bankruptcy filings, including the California cities of Stockton and San Bernardino, were caused by a “buildup of significant long-term liabilities.” Those long-term deficiencies left the cities unprepared for the “revenue shock of the Great Recession,” according to Reuters.

But the researchers said cities’ underlying structural problems would persist “even under optimistic growth scenarios.” Similar concerns, particularly about states and localities’ unfunded pension liabilities, led Moody’s Investors Service to consider new rules that could lower some governments’ credit ratings beginning this fall.

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Anonymous (not verified)

on Aug 14, 2012

Let us see, Morgan Stanley/Wall Street and their investors are more concerned with bad credit risks for cities, rather than their potential bankruptcies?
These agencies, and Moody's, refer to the "buildup of significant long-term liabilities" and "long term deficiencies leading to the revenue shock of the Great Recession" experienced by the several cities that have already gone belly-up.
Bear in mind that these cities are leaving behind underfunded pensions. I now present Evanston, Illinois. Their debts and liabilities are 2-1/2 times their operating budget, including a $205 million pension deficit, yet the city is given a AAA Bond Rating; and Moody's is waiting 'til fall to reevaluate their procedures?
What assets does a city have, other than our ability to ante up? When does solvency become insolvency? If we as individuals had a ledger like this, no one would lend us a dime!